How did the 2003 dividend tax cut affect stock prices?

We test the hypothesis that the 2003 dividend tax cut boosted U.S. stock prices and thus lowered the cost of equity. Using an event-study methodology, we attempt to identify an aggregate stock market effect by comparing the behavior of U.S. common stock prices to that of European stocks and real estate investment trusts. We also examine the relative cross-sectional response of stock prices for high-dividend and low-dividend stocks. We find that U.S. large-cap and small-cap indexes do not outperform their European counterparts, nor REIT stocks, over the event windows, suggesting the absence of a notable aggregate stock market effect. Second, high-dividend-yield stocks outperformed low-dividend-yield stocks by a few percentage points over the event windows, consistent with the hypothesis that investors heavily discounted future dividends, though this outperformance appears to dissipate in subsequent weeks. Finally, non-dividend paying stocks are found to have outperformed the overall market by a small margin, but this result does not appear to be tied to tax-cut news, suggesting that non-tax factors were at play.